As most seasoned investors will know, there are a myriad number of investment products available to you, but have you considered commercial real estate investing? And how do they compare to residential investments?
Most commercial real estate investments yield a higher rate of return over residential buy-to-lets. They also tend to afford the investor a steadier stream of cash flow and lower vacancy risks. However, it is still very important -perhaps more so – to do the necessary due diligence when assessing a commercial real estate investment.
Just like the name suggests, commercial real estate investments normally entail properties that are principally for business purposes, which are then leased to tenants from the business or customers that occupy them. Common examples are warehouses, retail, office space and mixed-use buildings. They can also extend to other, lesser-known ones like airport parking spaces or self-storage units. These latter ones in particular are more accessible due to low entry levels of around £20,000.
Due diligence often starts with assessing the viability of the commercial investment in question, and then moving onto aspects like location. For example, if considering office space, the investor will need to know things like local transport infrastructure, the demand for such commercial properties and indeed the projected demand over the coming years.
In some instances, it’s necessary to consider the management company that will be looking after your investment on a day-to-day basis; this is especially so for totally hands-off investments. Using the office space example, have they got a proven track record, a good management and administrative team in place, and how long have they been operating? Have they got past projects you can take a look at and see what they have achieved with them?
Location location location
We’ve all heard this said before, but with commercial real estate it’s especially important and a must for taking into consideration. What transportation infrastructure is in the local area and is it accessible? What investments have, or are, being made in the area to accommodate expected growth and demand? It’s also advisable to consider what competition is nearby, and if there is any how are they doing? Is your potential investment unique in some way and offer something different hat the competition doesn’t?
As with airport parking spaces or office space, it’s often the case that the developer has already done a great deal of market research and made this information easily accessible to potential investors. Still, there is no substitute for doing some of your own research for peace of mind.
Capital appreciation on commercial property investments (the increase in value of the property, as differentiated from the rental income) is often very good, and even sometimes the principal motivation for some investors when deciding on commercial properties.
In some instances, “flipping” is used to bring about significant appreciation. Flipping can be understood by comparison to residential investments whereby an old, run-down house is purchased for extensive renovation and then sold off for a nice return. This is commonly used by investors looking for a quicker return than by leasing. However, leasing can often be a better long-term strategy, especially in areas that are expected to see significant growth and investment over time and therefore a sizable jump in the valuation of the property.
Due to low interest rates, and perhaps even lower following the example of negative interest rate countries like Japan, commercial property investments have seen a spike in growth over the last few years. Keeping too much money tied up in low-yielding bank accounts doesn’t make much sense; and taking into account purchasing power being eroded with inflation, and in addition the possibility of bank “bail-ins” in the event of another banking crisis, then placing hard-earned cash into sound commercial property investments is becoming increasingly popular.